April, Friday 06, 2012

If the employment report falls on a holiday weekend, does it make a sound? Yes it does; the sound is a loud thud.

Earlier today the US Department Labor released March employment statistics. The report shows an increase of 120,000 non-farm payrolls, which is significantly lower than the estimated 200,000 new jobs and less than half the average monthly increase in the prior three months. On the other hand, the unemployment rate fell from 8.3% to 8.2%, which is lower than the estimate of 8.3%.So clearly, the correct bet was to take the “unders”. Just in case you were wondering, Goldman Sachs yesterday raised their prediction from 175,000 to 200,000; which means Goldman is either a ship of fools or they were betting that you are a muppet that would take that bet, and they were betting against you.

What happened? One explanation is that the warm winter weather across much of the country produced a little boost of economic activity in December, January, and February; and now we're returning to the more normal rate of growth for the past couple of years, which is fairly weak. There is growth, it just isn't robust.

Prices for U.S. Treasury debt rallied on the report, pushing yields to more than three week lows, as investors anticipated further bond purchases by the Fed. This is not a guarantee of QE3 but the report certainly did not take QE3 off the table. The dollar fell. The US stock markets were closed for Good Friday, but stock futures were down about 1%.

Some numbers: There were 120,000 payroll jobs added in March, with 121,000 private sector jobs added, and 1,000 government jobs lost. It looks like the drag from state and local layoffs is nearing the end. The unemployment rate declined to 8.2% but part of that is because workers were leaving the labor force. The participation rate decreased slightly to 63.8% (from 63.9%) and the employment population ratio also decreased slightly to 58.5%. The household survey - from which the jobless rate is derived and is separate to the measure of new jobs - showed a drop in employment for the first time since June. The unemployment rate fell to its lowest level since January 2009. The unemployment rate has fallen from 9.1 percent in August.

U-6, an alternate measure of labor under-utilization that includes part time workers and marginally attached workers, declined to 14.5% from 14.9% in February. This remains very high - U-6 was in the 8% range in 2007 - but this is the lowest level of U-6 since early 2009.

The change in January payroll employment was revised down from +284,000 to +275,000 ( a revised loss of 9k), and February was revised up from +227,000 to +240,000 ( a revised gain of 13k). 

The retail sector lost jobs for the second straight month, pulling down job growth in the private service sector; this despite reports earlier this week that retailers such as Macy's and Target posted brisk business in March.

Manufacturing jobs picked up a little and workers saw an increase in their overtime hours, helped by carmakers trying to meet pent-up demand for motor vehicles. Factory jobs increased 37,000 in March and 31,000 in February.

The average workweek declined 0.1 hours to 34.5 hours, and average hourly earnings increased 0.2%. "The average workweek for all employees on private nonfarm payrolls edged down by 0.1 hour to 34.5 hours in March. ... In March, average hourly earnings for all employees on private nonfarm payrolls rose by 5 cents, or 0.2 percent, to $23.39." This is sluggish earnings growth, and earnings are still being impacted by the large number of unemployed and marginally employed workers.

There are a total of 12.67 million Americans unemployed and 5.3 million have been unemployed for more than 6 months. These numbers are declining, but still very high. The number of part time workers decreased sharply in March - and is back to 2008 levels - but this is still very high. There are 5.308 million workers who have been unemployed for more than 26 weeks and still want a job. This was down from 5.426 million in February. This is very high, but this is the lowest number since 2009.

The Economist presented an Alternative Jobs report Summary:

“There is a 90% chance that employment rose by between 20,000 and 220,000 jobs. The change in the number of unemployed from February to March was probably between (roughly) -400,000 and 150,000, and there's a good chance that the unemployment rate is between 8.1% and 8.5%. Reported changes for important subsectors are too small relative to the margin of error to be worth discussing. In all probability, the employment growth has remained close to the recent trend of a 200,000 jobs per month increase.

“This report will be widely analysed within the context of this year's political elections, despite the fact that the single most important influence on employment growth now and over the next four years will be the stance of monetary policy. As this report is consistent with recent Federal Reserve forecasts, indicating that the Federal Open Market Committee is satisfied with present employment trends, policy is unlikely to change in reaction to anything released today.”

Now, I know that there is disagreement about the accuracy of these numbers. There are big changes in methodology. But these are the numbers we have. This is the same survey we had for the past three months. The numbers looked fairly good then, they look bad now. So there's some bad news here. The good part is that it is just one report, and there is still growth of jobs (it was just a little more than 3 years ago the economy was losing 600k jobs per month) and as public sector job cuts are eliminated, that might serve to boost employment, but the bad news is that the economy is not adding jobs fast enough to maintain growth.

Risk assets tanked over the last couple of weeks on the assumption that Bernanke and the Fed wouldn’t continue to add monetary stimulus, with gold among the biggest losers. The latest FOMC statement, coupled with the minutes from that meeting, were interpreted as an acknowledgment of the improved economic situation, which in turn took QE3 off the table for now.

Friday’s weak report forces the discussion to gravitate back to a more QE3-prone environment.  While the weak number alone isn’t enough to force the Fed into action in the upcoming April 24-25 FOMC meeting, as Barclays’ analysts argue, “the soft employment numbers certainly leave the door open for further accommodation and may shift the decision point to the June FOMC as the Fed continues to monitor the incoming data.”

Do you believe the employment report numbers? Do you think the jobs situation benefits Republicans or Democrats? Do you have any position on the political ramifications of the report? What do you think the Federal Reserve will do with this information? Will we see more Quantitative Easing? Will another round of QE do more harm than good? QE doesn't fix structural problems, so I don't think we're going to see any sustainable change? Were you surprised by how badly the report missed estimates? Why do economists make such bad guesses?

As I was reading today, I was reminded of a quote from Shakespeare. I'll share it because it is quite beautiful; from Merchant of Venice:

The quality of mercy is not strained. 
It droppeth as the gentle rain from heaven 
Upon the place beneath. It is twice blest: 
It blesseth him that gives and him that takes. 
Tis mightiest in the mightiest; it becomes 
The throned monarch better than his crown. 
His scepter shows the force of temporal power, 
The attribute to awe and majesty, 
Wherein doth sit the dread and fear of kings. 
But mercy is above this sceptered sway; 
It is enthroned in the hearts of kings; 
It is an attribute of God himself; 
And earthly power doth then show like God's 
When mercy seasons justice.

Happy Easter, Happy Passover.

Sinclair